JOHANNESBURG (miningweekly.com) – The shares of Lonmin rose 7% in Johannesburg and London as the market perceived the worst to be over for the right-sizing platinum miner, whose promised actions were largely on track.

"We announced 700 000 oz and produced 683 000 oz. We were a tad below, but all the other measures – of production from the new shafts, cost control and balance-sheet management – have been broadly in line with consensus, or a little better," Lonmin CEO Ian Farmer told Mining Weekly Online.

"Also, we are seeing very early signs of improvement in the market place. We think that 2010 will be a year of gradual improvement and then a strong rebound in market prices in 2011 and 2012.

"We have a period now of under-investment, which is naturally going to mean that supply is going to be constrained at a time when the market returns to a more robust demand outlook.

"All in all, we're trying to position Lonmin to be in a good state and to exploit that market whenever it turns," says Farmer.

Lonmin lost 5% of platinum group metal (PGM) production – some 30 000 oz – on statutory safety stoppages, and Farmer said a "more cooperative" approach could be beneficial to all and at the same time not, in any way, diminish safety.

"But that's going to take some hard work, and it's not to detract from safety remaining at the top of the agenda," he said.

Farmer and his executive management team would from January 1 be relocating from London to Johannesburg.

"This is not primarily cost-saving driven. There will be some cost savings, but it will not be material. The primary reason is for me to be closer to the business. It just makes more sense to be close to the asset, to improve communication and be visible as a leader to the business.

"It also enables me to empathise more and to communicate better with stakeholders like government and unions," Farmer said.

On Lonmin's talks with its black economic empowerment partner Incwala, he said that it was the historically disadvantaged South African (HDSA) shareholders in Incwala that were struggling to meet their refinancing obligation.

The HDSA shareholders were exploring what options there were to resolve the situation.

"Clearly, we are at the table, but I can't predict the format that will resolve this or when it will be resolved," Farmer said.

"One of the potential ways forward is to introduce further equity into structure and any new parties must be people who we believe we can work with constructively," he added.

Evolution Securities mining analyst Charles Kernot said Incwala was in default with its banks and needed financial restructuring.

"There is a chance that this could involve the calling of Lonmin's guarantee. Unfortunately, the red ink could well continue," Kernot said, in putting a "sell" recommendation on the Lonmin share.

Farmer explained to Mining Weekly Online that Lonmin did give various guarantees in the original Incwala structure five years ago.

In round numbers, those totalled $100-million, of which a $39-million call had already been made by Impala Platinum, which had outstanding vendor financing loans.

"We have paid Impala under that guarantee and, of course, we have a corresponding asset because Incwala now owes Lonmin that money instead of owing it to Impala.

"There's a further tranche of the guarantee that could be called in December of $20-million, but these are fairly small numbers on context to the overall size of Lonmin," Farmer pointed out.

Lonmin had net cash of $113-million and debt facilities of $875-million.

"Clearly, in today's world of balance sheet management, one has to be extremely cautious and prudent in these issues. These are not life-threatening events," he said.
Lonmin is in the position of being over the hump in the capitalising of its new growth Saffy, Hossy and K4 shafts at Marikana.

"The shafts are sunk, they're equipped, and they're functioning. Two of the shafts - Saffy and Hossy - are in ramp-up phase and the third large K4 will commence production in 2012.

"The vast majority of the spend that is left is in creating the right access to the orebody and creating the reserve footprint."

Lonmin said in its latest results presentation that it would take its production to a sustainable 850 000 oz of platinum a year, potentially by 2013, subject to market conditions.

"We need to generate a decent cash flow and keep our balance-sheet management fairly tightly in check so that, as markets improve, we can release that cash in capital and we can deliver that profile, if circumstances warrant. If the market doesn't pick up as we envisage, we can slow that down," he said.

On the possible disposal of Lonmin's Baobab mines in Limpopo province that are on care-and-maintenance, Farmer told Mining Weekly Online that both the Limpopo mine and the Akanani project were "longer-term growth options for the company".

The Limpopo mine was an important source of PGMs with a high base metal content, which was important from the perspective of smelting upper group two (UG2) reef.

"You need a high base metal element in the blend to process UG2, so Limpopo has its value for us in that context," he said.

Akanani was a high-quality orebody that presented a high capital hurdle.

"But, nevertheless, it's very attractive because of its size and the width of the orebody is conducive to mechanised mining. They are longer-term options and we have not included those mines in the guidance that we have given of being a producer of 850 000 oz a year on a sustainable basis.

"The 850 000 oz annually is the production volume we believe can be sustained from Marikana orebody," he added.

On Lonmin's wage talks under way with the unions, Farmer expected robust wage discussions to continue for a few weeks yet.

With the South African mining industry paying wage increases above the level of inflation, it would be "very difficult" for Lonmin not to follow market norms that had already been set.

On the electricity price rises, he said that electricity represented only 3% of Lonmin's overall costs and, while the 45% numbers being proposed were not particularly helpful, they were also "not catastrophic to the business".

"We will be joining the industry debate with Eskom and government as to how these tariffs may pan out eventually. The consultation process will follow its course.

"The big issue and the more immediate worry is the strength of the rand. The PGM industry does have considerable headwinds from a number areas at this point in time, of which the rand is the biggest," Farmer said.

The company planned no rand-induced retrenchments at this stage.

"We believe that next year we can produce around 700 000 oz of platinum and gradual growth thereafter. If I can keep the cost base tightly under control during that period, the extra through put will take us down the cost curve," Farmer added.